Jeffrey M. Verdon Law Group, LLP
Ph: 949-988-0939

No Good Deed Goes Unpunished: The Do-Over Trust

Dear Clients, Colleagues, and Friends,

1998:

You've accumulated some sizable estate assets, and you and your lawyer create an irrevocable dynasty trust for your baby son to protect his legacy and provide him a long-term financial safety net. You are a thoughtful and loving parent...

2018:

A lot has happened in 20 years. The business world has changed, and the path to independent adulthood lies obscured in your child's generation's new definition of success: do what makes you happy, when it makes you happy. Within this paradigm, your son has turned into a lazy young adult with a recent college degree in History of the Ottoman Empire. Yes, it's just a BA, and no, there is no PhD in his future. With a resume full of throwaway summer jobs, your son has moved back home, with no career prospects.

Then, the icing on the cake: your estate planning lawyer calls to remind you she will be making the first sizable distribution from your son's trust this month. Hearing you groan, she gently reminds you that he can use the money in any manner he sees fit. You rightfully worry that he will quit looking for a job the minute he gets the money and become a "trust fund baby."

You ask your estate planner to stop the distribution and beg her to save your son from himself. If he gets this money now, he'll never get a job and move out. Unfortunately, the trust you asked her to prepare is irrevocable and cannot be amended.

Sound familiar? You and thousands of Americans are in the same boat, looking to protect your adult children from themselves.

Thirty years ago, conventional wisdom was to draft irrevocable trusts. Estate planners didn't foresee that changed economic and societal circumstances could backfire on the client. No one did.

Until recently, changing an irrevocable trust was impossible. Fortunately, there is now a fix.

Although rather late to the party (25 states already have decanting statutes) the California legislature passed legislation that went into effect on January 1, 2019, allowing you to fix a broken irrevocable trust - at least in part and for very limited situations.

The process has become known as "decanting," wherein you can pour the assets out of an old inadequate irrevocable trust into a new irrevocable trust with more suitable provisions for the changed circumstances. This "Do-Over" Trust can rectify unwanted provisions of an old trust with new terms in a new trust.

All Decanting statutes are not created equal. California's new statute is quite restrictive and has onerous notice requirements and possibly inadequate for many situations. Therefore, if the broken trust contains a "change of situs" provision (as most well drafted trusts do), consider moving the trust situs to another state like, NV, DE or SD, states with much more flexibility and then decant under that state's laws.

Besides the foregoing, reasons to decant a trust would be:

· Extending the term of the trust: For extended protection to trust assets;

· Changing a support trust to a discretionary trust: Changing distributions from "mandatory" to "discretionary" could protect against pending liabilities, creditor claims, tax liens, or marriage dissolutions;

· Correcting drafting error;

· Changing a support trust to a discretionary trust: Changing distributions from "mandatory" to "discretionary" could protect against pending liabilities, creditor claims, tax liens, or marriage dissolutions;

· Correcting drafting error;

· Changing the governing law: For example, to avoid state income tax;

· Combining trusts for greater efficiencies;

· Creating "special needs" trusts; and

· Qualifying a trust to hold S Corporation shares: Allowing valuable estate planning and asset protection opportunities.

Decanting is a relatively new concept, and the legal community is just discovering what planning opportunities exist to fix poorly drafted or antiquated irrevocable trusts previously thought to be non-correctable.

If you have need of a "do-over" trust and wish to contact us about your options, we would be pleased to assist.

Jeffrey M. Verdon, Esq.

For more information about any of the information discussed in the Client Alert, or any other income or estate tax planning or asset protection planning assistance, please contact the: Jeffrey M. Verdon Law Group, LLP at [email protected] or 949-333-8152.

NOTE: This newsletter is a publication of Jeffrey M. Verdon Law Group, LLP and is intended to provide information on recent legal developments. This report does not create an attorney-client relationship nor should it be construed as legal advice or an opinion on specific situations. If you do not wish to receive future law updates and alerts, please send a reply email to [email protected] asking to be removed from the mailing list.

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